Globalization, financial crisis and contagion: time-dynamic evidence from financial markets of developing countries

Simplice A, Asongu (2011): Globalization, financial crisis and contagion: time-dynamic evidence from financial markets of developing countries.

Abstract

Financial integration among economies has the benefit of improving allocation efficiency and diversifying risk. However the recent global financial crisis, considered as the worst since the Great Depression has re-ignited the fierce debate about the merits of financial globalization and its implications for growth especially in developing countries. This paper examines whether equity markets in emerging countries were vulnerable to contagion during the recent financial meltdown. Findings show: (1) with the exceptions of India and Dhaka, Asian markets were worst hit; (2) but for Peru, Venezuela and Columbia, Latin American countries were least affected; (3) Africa and Middle East emerging markets were averagely contaminated with the exceptions of Kenya, Namibia, Nigeria, Morocco, Dubai, Jordan, Israel, Oman, Saudi Arabia and Lebanon. Results have two important policy implications. Firstly, we confirm that Latin America was most prepared to brace the financial crisis, implying their fiscal and monetary policies are desirous of examination and imitation. Secondly, we have confirmed that strategic opening of the current and capital accounts based on empirical evidence for a given region/country as practiced by India is a caution against global economic and financial shocks.

• Item Type: MPRA Paper
• Language: English
• Keywords: Globalization; Financial crisis; Contagion; developing countries; Equity Markets
• Subjects: F - International Economics > F3 - International Finance > F30 - General; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets; G - Financial Economics > G1 - General Financial Markets > G10 - General

References

Anoruo, E., & Mustafa, M. 2007. An empirical investigation into the relation of oil to stock market prices. North American Journal of Finance and Banking Research. 1(1): 1-15.

Calvo, G.A., Leiderman, L., & Reinhart, C.A. 1996, Spring. Inflows of capital to developing countries in the 1990s. Journal of Economic Perspectives. 10:123-139.

Collins. D., & Biekpe, N. 2003. Contagion: a fear for African equity markets?. Journal of Economics and Business. 55: 285-297.

Coulibaly, B.2009. Effects of financial autarky and integration: The case of South Africa embargo. Journal of International Money and Finance. 28:454-478.

Demyanyk, Y., & Volosovych, V. 2008. Gains from financial integration in the European Union: Evidence for new and old members. Journal of International Money and Finance. 27 :277-294.

Forbes, K. J. 2000.The Asian flu and Russian virus: firm-level evidence on how crises are transmitted internationally. NBER Working Paper 7807.

Forbes, K., Rigobon, R. 2002, October. No contagion, only interdependence: measuring stock market co-movements. Journal of Finance. 57(5): 2223–2261.

Frankel, J. & Rose, A., K. 1996. November. Currency crashes in emerging markets: An empirical treatment. Journal of International Economics. 41:351-366.

Henry, P.B. 2007, December. Capital Account Liberalisation: Theory, Evidence and Speculation. Journal of Economic Literature. XLV: 887-935.

In, F., Cui, J., & Mahraj, A. 2008. The Impact of a new term auction facility on LIBOR-OIS spreads and volatility transmission between money and mortgage market. http://papers.ssrn.com/sol3/papers.cfm?abstract id=1272806 (unpublished manuscript).

Ji, P. I., & In, F. 2010. The Impact of the global financial crisis on the cross-currency linkage of LIBOR-OIS spreads. Int. Fin. Markets, Inst. and Money. 20:575-589.

Kanas, A. 1998. Linkages between the US and European equity markets: further evidence from cointegration test. Applied Financial Economics. 8 (6):607–614.

King, M., Sentana, E., Wadhwani, S. 1994. Volatility and links between national stock markets. Econometrica. 62 (4):901–933.

King, M., & Wadhwani, S.1990. Transmission of volatility between stock markets. Review of Financial Studies. 3(1):5–33.

Kose, M.A., Prasad., E.S., & Taylor, A.D.2011. Thresholds in the process of international financial integration. Journal of International Money and Finance. 30:147-179.

Lee. H., Wu. H. & Wang. Y.2007. Contagion effect in financial markets after the South-East Asia Tsunami. Research in International Business and Finance. 21:281-296.

McAndrews, J., Sarkar, A., & Wang, Z. 2008. The Effects of the term auction facility on the London inter-bank offered rate. Federal Reserve Bank of New York Staff Reports 335.

Obstfeld, M. 1986, March. Rational and self-fulfilling balance of payments crises. American Economic Review. 76:72–81.

Schmukler, S.L.2004, April. Financial Globalization: gain and pain for developing countries. Federal Reserve Bank of Atlanta Economic Review:39-66.

Taylor, J.B., & Williams, J.C.2008. Further results on a black swan in the money market. Stanford Institute for Economic Policy. Research Discussion Paper 07-046